starbucks4ever (98.33)

Commercial RE crash: why now?

10

Am I wrong in saying that the pundits have started talking about the impending commercial RE crash only now that it crashed 40% from the peak levels? Should I then treat these prognostications the same way as we treat those "financial analysts" that upgrade stocks at the peak only to downgrade them at the bottom?

I don't invest in Real Estate stocks (other than banks), so I don't claim to have any special knowledge, but in looking at what NAMA is getting ready to do in Ireland, they are making the banks take a 30% discount on the planned "buyout".

Maybe this would be a reasonable level to look at for the longer term for commercial real estate.

Well remember its not a crash until the banks feel it. So its not so much that the value of commercial RE has fallen as much as it is that the deliquency rates of Commericial RE loans are just beginning to have a material effect on bank balance sheets.

the issue rises with the fact that, because the of the decrease in commercial RE values, the collateral value attached to the loans don't cover the principal -- therefore, if the issuer decides not to voluntarily default on a loan, the holder will be out of luck by at least the different in collateral value and principal of the loan.

its a very odd situation where the issuers can actually pay off the loans with the cash flows given time and credit to do so, but if the banks aren't willing to renew credit and loans, the real estate companies have no choice but to default -- one that the US government is trying to tackle.

You are right of course that there is knowledge and knowledge, but your analogy is not very accurate. In summer of 2007, the index had just given away a couple of percentage points. Today we are talking about Commercial RE crash when the index is already down 30-40%. If Commercial RE is like stocks, we're now reliving last year's October. The devil's rally from 666 is just 5 months away...

When we see Maguire Properties, Newcastle Investment, Glimcher Realty, Deerfield Capital, Grubb & Ellis, Maui Land and Pineapple, HFF, Hovnanian and a few others go bankrupt I think that will be a good sign of a real estate bottom.

> Today we are talking about Commercial RE crash when the index is already down 30-40%. If Commercial RE is like stocks, we're now reliving last year's October. The devil's rally from 666 is just 5 months away...

Outoffocus already answered it - while various REITs are trading like a yo-yo, it is really about the write offs the banks have to take this time, not abou the REITs themselves.

Banks hav been playing the game of chicken with CRE for the last 3 years, but now the have to startt taking some wirte offs and that will continue at least another 2-3 years into the future. Perhpas, they can spread the write offs out and gain their way out of it, perhaps not. CIT bankruptcy is no a good thing ewither, it hurts small businesses and in most cases it is small businesses that are paying these CRE mortgages.

Commercial RE deliquencies are approaching 5% which is high based on historical standards. Also, its not so much that the "banks aren't willing to renew credit" as much as with the crash of the CMBS and CDO market, the liquidity just isnt there to renew these loans. Most commercial RE loans have short maturities and are coming due this year and next. When the loan cannot be re-financed, it goes into default. So the deliquencies in the commercial RE market are just beginning. To add fuel to the fire, the government can only step in to refinance certain types of properties (multifamily, etc). The remaining properties will be left high and dry (pun intended).

This surge in commercial RE loan defaults will cause hundreds more banks to fail. The effects are just beginning to be felt. Thats why the prognosticators are just beginning to talk about it.